Restructure debt with personal loan?

Dear Dr. Don,
I have been considering taking out a personal loan and paying off some credit card debt, but I'm not sure if this is a good idea. Will this affect me when I go to buy a house or rent an apartment?

Thanks,
-- Shante Structure

Dear Shante,
Taking out a personal loan doesn't pay off your plastic. It just restructures the financing of that debt. You'd consider doing it if you can get some combination of the following financial outcomes: a lower interest rate on the personal loan than on the credit cards, a lower monthly payment or a longer loan term.

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As long as you make the minimum monthly payments on your cards, there's no defined loan term on credit card debt. A personal loan will have a defined loan term, typically four to five years, so lengthening the loan term isn't the reason to restructure the debt.

A lower interest rate has the potential to reduce the total interest expense on the debt. A personal loan is typically an unsecured debt, just like a credit card is unsecured debt. Bankrate's national average rate for fixed-rate cards is 13.81 percent; for variable-rate credit cards, it's 14.52 percent. With a good credit history, you're likely to get a lower interest rate on a personal loan than you have on your credit cards. Bankrate can help you compare rates.

The longer the term and lower the rate, the lower the monthly payment. It's common for personal loans to be short-term loans of four to five years, so you may find that a personal loan increases your monthly payment, even with a lower interest rate.

Your loan payment can be calculated using the loan balance, interest rate and the loan term. Restructuring several credit card balances into one loan may reduce your monthly hit if the sum of all the minimum payments on the credit cards is more than the personal loan payment.

Your question about the impact if you try to buy a home or rent an apartment comes down to your credit score, which would be checked by a mortgage lender or landlord. Consolidating your debt into a personal loan will have a limited impact on your credit score.

On the plus side for your credit score, you'll increase the types of credit you're using and increase the available balances on your cards. On the negative side, you'll have a recent credit inquiry -- related to the loan -- and you'll increase the available balances on your cards.

That's right: Paying down the balances is both a positive and a negative for your credit score. The negative is in the potential for your total debt outstanding to increase if you start running up balances on your credit cards again. Still, you don't want to close the credit card accounts and lose the length of account history on your credit report. You just want to keep the outstanding card balances low.

If you can live within your means and the personal loan approach makes financial sense in your situation, then I don't see a credit score issue if you restructure your debt with a personal loan.

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Dr. Don Taylor, in addition to answering our readers' questions about personal finance, is an assistant professor of business administration at Penn State Brandywine in Media, Pa. He holds a doctorate in finance and has earned both master's and bachelor's degrees in finance.

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